Africa’s Growth Prospects. Africa’s gross domestic product (GDP) is expected to grow at 3.8 percent in 2019, which is a significant improvement over last year’s regional growth rate of 2.6 percent. Excluding the continent’s largest economies (Angola, Nigeria and South Africa), which are growing collectively at an average of 2.5 percent, the aggregate growth rate for the region would be a healthy 5.7 percent. According to Foresight, about half the of world’s fastest growing economies are in Africa, with 20 economies expected to grow at five percent or more over the next five years. This includes Burkina Faso, Tanzania, Uganda, Kenya, Senegal, Benin, Cote d’Ivoire, Ethiopia, Ghana and Rwanda. We will be watching whether commercial debt, both from the issuance of Eurobonds and Chinese loans, starts to be a drag on growth. Good governance and transparency will also impact the economic performance across the region.

African Continental Free Trade Agreement. While some of the world’s leading economies struggle to grow due to the implementation of protectionist trade policies, the leadership of the African Union (AU) is working to create the world’s largest free trade zone since the formation of the World Trade Organization. Concerns about an increasingly bureaucratic AU did not prevent 50 of the 55 African nations from signing the AfCFTA. To date, 18 of the required 22 countries have ratified the framework designed to eliminate tariffs on a large variety of goods and significantly boost intra-Africa trade. Non-tariff barriers to trade—including burdensome customs controls, high settlement payments, deficient distribution channels, and corruption—may prove to be the most difficult hurdles to a more prosperous Africa and deserve close scrutiny as the AfCFTA progresses toward implementation. Furthermore, collaboration between the private sector and governments will be critical in areas of intra-African trade infrastructure, trade finance, trade information, and logistics services for the AfCFTA to be successful.

Enhancing Africa’s Connection to World-Class Computing. Africa’s economic growth in 2019, which will be accelerated by technological innovation across all sectors, coincides with global trends toward digital and shared economies. A growing focus on efficient and scalable utilization of assets will lead to innovative, high growth, and high impact opportunities in Africa. Critical to this transformation is the commitment by leading cloud computing companies to build data centers on the continent, which will enable broader access to advanced computing resources and services driven by artificial intelligence, machine learning, and the Internet of Things (IoT). Cloud computing resources will lead to more productive and knowledge-based economies and help Africa’s young and fast-growing population create innovative opportunities while addressing challenges in key sectors like healthcare, transportation, trade, and education. How African policy makers collaborate with the private sector to enact enabling and harmonized privacy, cybersecurity, and related policies and regulations that protect individual and institutional data is one of the key issues to watch in this space.

Development Finance in Africa. Leveraging the power of the private sector through development finance is an increasingly popular complement to traditional foreign aid around the world. In October, the United States took steps to modernize its approach to development finance with the passage of the Better Utilization of Investment Leading to Development (Build) Act, which was signed into law by President Trump on October 5, 2018. The Act creates a new institution—the U.S. International Development Finance Corporation (USDIFC)—which will merge the Overseas Private Investment Corporation (OPIC) and several USAID facilities, including the Development Credit Authority (DCA), the Office of Private Capital and Microenterprise (OPCM), and enterprise funds. With $60 billion dedicated to USIDFC, the new entity will have twice the amount of money to invest as compared to OPIC’s current lending cap of $29 billion. OPIC’s president and chief executive was explicit about one of the primary motivations behind USIDFC: to be “a financially sound alternative to the state-directed initiatives pursued by China that have left many countries deep in debt.” It is estimated that China leverages $40 billion through is varied development finance institutions, monies implemented with no political conditionalities attached under the umbrella of China’s One Belt One Road initiative. According to the Washington-based Atlantic Council, between 2012 and 2016, projects in sub-Saharan Africa accounted for the largest share of DFI commitments ($14.2 billion), followed by East and South Asia ($10.5 billion), and Latin America ($10.2 billion). Monitoring the implementation of USDIFC, and assessing how its offerings affect China’s DFIs, if at all, will be of interest to corporations and public policy makers alike.

A Continuing Trend of Anti-Corruption Enforcement. Last January, we noted that anti-corruption initiatives were on the rise on the continent, with 2018 declared the “African Anti-Corruption Year” by the African Union. If 2018 is any indicator, we expect that this trend will continue in 2019 and beyond. While the sheer volume of anti-corruption enforcement actions involving conduct in Africa in 2018 was not particularly significant, recent developments suggest that companies operating in Africa can expect heightened scrutiny from anti-corruption enforcers in the coming year. As we have previously described, France’s arrival on the international enforcement scene is likely to be particularly notable in this regard, given the large number of French companies operating in Francophone Africa. On the domestic enforcement front, in South Africa we will be watching developments in the sprawling “State Capture” matter, which is focused on allegations of widespread corruption and conflicts of interest in the government of former president Jacob Zuma. We can also expect U.S. enforcers to continue to be active on the continent, as evidenced by the successful prosecution of Chinese national Patrick Ho in a case involving alleged bribes on behalf of a Chinese energy company in Chad and Uganda, and the early 2019 indictments of a number of individuals in connection with Mozambique’s “Tuna Bond” scandal. Finally, as we have previously discussed, multilateral development banks will continue to play an important enforcement role in Africa. The World Bank, which has aggressively enforced its sanctions and debarment procedures for several years, initiated 28 investigations in Africa in its 2018 financial year alone, representing 41 percent of all new investigations. With this enforcement activity in the background, we expect that companies operating in Africa will need to continue to focus on developing and implementing effective anti-corruption compliance programs. In the coming weeks and months, we will be further analysing anti-corruption developments on the continent, and providing insights on how companies can best mitigate corruption risk in their operations in Africa.

Project Finance. Based on the African Development Bank’s estimate that there remains a $68–$108 billion financing gap to meet Africa’s infrastructure needs, which is estimated to be in the range of $130–$170 billion annually, we expect to see continued growth in project finance projects during 2019. Lending from development finance institutions (DFIs) continues to play a crucial role in project finance across Sub-Saharan Africa, particularly in the infrastructure sector. Power projects will also be a key driver of project finance work on the continent. Today, an estimated 600 million people in Africa lack access to electricity. This power deficient on the continent coincides with the increasing interest and investment in renewable energy sources, and thus we expect to see more renewable energy projects on the continent in 2019. In particular, we anticipate a higher volume of smaller scale power projects due to the demand for less complex projects that can be implemented quickly.

Climate Change, Energy, and Business. Climate change will remain a key issue for countries and companies in 2019, as we continue to see impacts globally from fires in California to a faster melting glaciers in Antarctica. The Intergovernmental Panel on Climate Change has declared Southern Africa a “climate change hot spot.” In 2019, we expect there will be more focus on types of fuel for new projects that are being developed in Africa. The financial impacts and outlook for renewable (wind, geothermal, hydro, and solar) and thermal (gas, coal, diesel, and HFO) energy will be impacted by improvements in technology as well as regulatory and economic issues. The handling of these issues (price, intermittency, base load, land rights, and tax incentives) will be key to financing these projects. There will be increasing pressure from the development finance institutions to finance more renewables projects, but economic factors will determine most fuel sources such as fuel availability, grid stability and strength, and overall project cost. All of this will add complexity and time for completion of these projects. Notably, there are potential wind and geothermal projects in Kenya and Ethiopia, while South Africa is likely to implement the next round of bids for the REIPPP wind projects.

South Africa. With elections expected in May, the Ramaphosa government needs to deliver on economic growth which the World Bank indicates was 1.3 percent in 2017, rising only to 1.4 percent in 2018, due to high levels of unemployment, low business confidence, and policy uncertainty. While the issue of expropriation without compensation looms large, UBS, the world’s largest wealth manager, believes that the South African government will manage the land reform issue “sufficiently well.” Reform of key parastatals including, Eskom and South African Airways, is a pressing matter. The ongoing prosecution of Jacob Zuma and his former officials will be a constant reminder of the corruption and lack of transparency that characterized his tenure. On the positive side, Ramaphosa’s campaign to attract $100 billion in new investments in five years is starting to show results. The South African government is also hopeful that last year’s Job Summit will be a stimulus for the creation of over 10,000 jobs.

Ethiopia. Perhaps the most exciting leader on the continent, 42-year old Dr. Abiy Ahmed has raised expectations that Ethiopia will become the next economic powerhouse on the continent. Not only is Ethiopia the second most populous country, with 100 million people, but it is the fastest growing economy in Africa with a GDP of 8–10 percent. Abiy’s unprecedented reforms include normalized relations with Eritrea after 20 years of hostility, the release of thousands of political prisoners, lifting the state of emergency, and cutting the number of ministries from 28 to 20 while ensuring half of all cabinet positions are filled by women. Some of the challenges that Abiy will face in coming months include managing the influx of refugees from Eritrea (which are arriving at an estimated 10,000 per month), decreasing ethnic tensions and competing factions within the ruling Ethiopian People’s Revolutionary Democratic Front (EPRDF), and preparing for local elections this year and national elections next year. The World Bank’s commitment of $1.2 billion in budget support is an important vote of confidence in Abiy’s reform process from the international community.

Nigeria. When elected in 2015, President Buhari promised to realize 10–12 percent annually GDP growth, secure the territorial integrity of the nation, and combat corruption. However, for 2019 the World Bank forecasts 2.2 percent growth for Nigeria, the Boko Haram insurgency in the northeastern part of the country persists despite significant progress, and the country continues to score lower than average for Sub-Saharan African nations on the Corruption Perception Index. These three fundamental issues will frame the presidential election scheduled for February 16, 2019. President Buhari may have an advantage given the power of incumbency but Atiku Abubakar, who was Vice President under President Obasanjo, will present a stiff challenge given his strong ties to business across the country. With 91 political parties and 35 presidential aspirants, there could be a run off given the spirited campaigns of Professor Kingsley Moghalu (former Deputy Governor of the Central Bank), and Donald Duke (a successful former governor of Cross Rivers State), and others.

A version of this blog was first published by African Law & Business. If you have questions about Covington’s Africa Practice, please contact Witney Schneidman at wschneidman@cov.com.

]]>China in Africa: Recent Developmentshttps://www.covafrica.com/2018/10/china-in-africa-recent-developments/
Mon, 29 Oct 2018 10:40:25 +0000https://www.covafrica.com/?p=7044Continue Reading]]>In 1998, China announced its “go out” or “go global” policy aimed at encouraging its enterprises to invest overseas. In 2013 this policy was reinforced with China’s introduction of its One Belt, One Road (OBOR) or “Belt & Road” initiative, which seeks to enhance development and trade routes in the region, connecting China with other countries along the ancient Silk road and a new Maritime Silk Road. Significant international anxiety has been expressed about China’s global ambitions generally, and as it pertains to Africa in particular, with some calling China’s OBOR initiative “neo-colonial” and raising concerns about China’s investments in Africa serving as a possible “debt trap.” On the other hand, China’s general policy of non-interference has led African leaders to describe China’s partnership with African countries as a “win-win.”

Below we examine recent trends related to China’s activity in Africa, including China’s 2018 FOCAC pledge of US$60 billion in financing, recent commitments made at the BRICS Summit, and China’s increasing foreign direct investment (FDI) on the continent.

Forum on China-Africa Cooperation (FOCAC)

On September 3, 2018, Chinese President Xi Jinping pledged US$60 billion in financing for projects in Africa. Of this total pledge, US$15 billion will take the form of grants, infrastructure, and concessional loans; US$20 billion will be available in credit lines; US$10 billion for development financing; and US$5 billion to buy imports from Africa. China made a similar US$60 billion pledge in 2015.

At the opening ceremony, President Xi emphasized China’s “five-no” approach to Africa:

[N]o interference in African countries’ pursuit of development paths that fit their national conditions; no interference in African countries’ internal affairs; no imposition of our will on African countries; no attachment of political strings to assistance to Africa; and no seeking of selfish political gains in investment and financing cooperation with Africa.

It is China’s policy of non-interference that leads many African leaders to echo South African President Ramaphosa’s rejection of the view that a new colonialism is taking hold in Africa regarding China’s investment in Africa.

A recent briefing paper published by Johns Hopkins School of Advanced International Studies’ China Africa Research Initiative concludes that “Chinese loans are not currently a major contributor to debt distress in Africa.” Although the initiative raised concerns in 2015 about the ability of African countries to repay Chinese loans due to fluctuating commodity prices and decreasing absorptive capacity, data analyzed in 2018 suggests that in at least eight of 17 countries, Chinese loans are quite small and have not contributed to debt problems. In six other countries, Chinese loans are larger, but those nations have also borrowed heavily from other creditors. In three countries, Chinese loans are currently the most significant contributor to high risk of actual debt distress; these countries are Zambia, Djibouti, and Congo.

In Zambia, a country that in 2012 could borrow more cheaply than Spain, bond yields have risen above 16 percent. According to The Economist, this suggests that investors fear Zambia will default. After having much of its debt cancelled under the IMF’s 2005 heavily indebted poor countries (HIPC) scheme, Zambia is now saddled with new debt worth 59 percent of its GDP. Although no one knows the exact amount, it is suspected that China holds between a quarter or one third of Zambia’s debt. One fear is that if infrastructure projects financed by the Chinese are cancelled, China may refuse to roll over existing loans. Alternatively, The Economist opines that China could demand to take control of a state-owned entity as compensation.

The coming months will be revealing in terms of how China responds to African nations nearing default on Chinese loans.

Highlights from 10th Annual BRICS Summit

In July, leaders from Brazil, Russia, India, China and South Africa (BRICS) met in Sandton, South Africa for the 10th Annual BRICS Summit. The Annual BRICS summit aims to strengthen economic and political ties between member countries.

In 2010, China invited South Africa to BRICS. Many questioned why China invited South Africa to join BRICS rather than other larger developing economies (e.g. Indonesia and Turkey). Some pointed to the “economic complementarities” between China and South Africa. See Foreign Capital Flows and Economic Development in Africa: The Impact of BRICS versus OECD at 31 (2017). As with China’s investments throughout the continent, its invitation to South Africa to join BRICS promoted China’s self-interest. Today, South Africa is China’s largest trading partner on the continent.

Since 2010, China has financially bailed out many parastatals (state-owned entities), which are common throughout Africa. At the 10th BRICS summit in July, China announced significant loans to two South African parastatals—Eskom, the public utility that provides electricity to 95 percent of South Africans and is the largest producer of electricity in Africa, along with Transnet, the country’s largest port, rail, and pipelines company. Eskom secured a US$2.5 billion loan from the China Development Bank, while the Industrial and Commercial Bank (ICB) extended US$27 million to Transnet. Transnet is said to deploy the funds for “general corporate uses,” providing the port and freight-rail operator “with liquidity in the near term.” Both loans have been described as “normal commercial loans” that are guaranteed by the government, which Eskom will use to fund the construction of the Kusile coal-fired power station.

This funding comes at a time when the state-owned entities face difficulties raising finance from local banks and investors. Eskom has growing debt burden that stood at over US$25 million at the end of March 2018; the loan secured from China Development Bank raised its debt ceiling significantly. Absent a revenue surge to help with interest payments, Eskom could be compelled to convert its debt into equity.

According to Institute of Race Relations (IRR), privatisation may be the viable option for struggling state-owned enterprises (SOE) such as Transnet and Eskom. Privatisation or bustby IRR argues that the alternative to privatisation is continued poor governance and rapid costs in both tax payers and continued delay in meeting the country’s need to upgrade and expand its economic infrastructure. Earlier this year former Finance Minister Malusi Gigaba issued dire warnings about Eskom, stating that the economy would collapse if Eskom’s liquidity crisis went unresolved. Consideration is being given to ring-fencing and selling stakes in Eskom’s non-core businesses or power stations as well as into Eskom’s business as a whole. In anticipation of possible privatization and an end to the electricity monopoly, the government forbade Eskom from constructing new power stations. The government advertised for private competitors to enter the market, but none were forthcoming mainly due to Eskom’s unnaturally low prices which deters profit-seeking enterprises from seeking to compete.

Of course China’s investment in Africa began prior to South Africa’s invitation to BRICS in 2010. China’s overall foreign direct investment (FDI) in Africa has also increased dramatically in the 21st century. In 2003, China’s FDI in Africa was approximately US$491 million. In 2014, it was US$32.4 billion.

Conclusion

What will come of China’s “go global” policy as it pertains to Africa? One thing is apparent: China’s influence throughout the continent will endure for decades. This, in part, is assured by China’s involvement with African parastatals that now rely on Chinese financing to remain liquid. China’s reputation on the continent, and the attitude of African leaders toward Chinese investment, will likely be influenced by how China responds to any African country that does default on a Chinese loan.

]]>Compliance Risks from Local Content Requirements – Considerations for Doing Business in Africahttps://www.covafrica.com/2018/10/compliance-risks-from-local-content-requirements-considerations-for-doing-business-in-africa/
Wed, 10 Oct 2018 19:32:00 +0000https://www.covafrica.com/?p=7027Continue Reading]]>Over the last several decades, Foreign Direct Investment (FDI) by multinational companies has become a critical engine of economic growth in Africa, with FDI in the extractive industries particularly significant. A common response by local governments in Africa to increased FDI is “local content” requirements, which are designed to ensure the participation of the local population in economic activity flowing from FDI. Due to weak oil prices and other challenges, the United Nations reported in June 2018 that FDI in Africa fell to $42 billion in 2017, a 21 percent decline from 2016. Nevertheless, according to the World Bank, economic growth in Africa is recovering steadily since the 2008 economic crisis and is expected to reach 3.1 percent in 2018 and tick up to 3.6 percent between 2019 and 2020. As companies assess opportunities on the continent, understanding local content requirements—and how to mitigate compliance risks when navigating this challenging area—is critical.

What are Local Content Requirements?

While local content requirements can take a number of different forms, their general purposes are to ensure the participation of nationals in the workforce, and the promotion of local suppliers, goods, and services. While short-term job creation is part of the local content equation, local content requirements also target longer-term gains in technical capacity and workforce development. An example of a fairly typical local content requirement is a preference for qualified nationals in hiring. Some countries may set a specific percentage requirement for the employment of country nationals. For example, Angola’s Petroleum Activities Law of 2004 sets the local workforce target at 70 percent, and oil companies are required to submit an annual “Angolanization” plan to the Ministry of Petroleum detailing how they plan to achieve this target. Additionally, many local content requirements establish some preference for qualified local suppliers and may require multinationals to partner with local businesses in a joint venture.

Compliance and Fraud Risk from Local Content Laws

Local content requirements create a number of significant compliance and fraud risks. They may create convenient opportunities to channel money or other things of value (e.g., jobs) to government or parastatal entity officials, their families, or affiliates. The most obvious way that this can happen is for a company to contract with a local content provider for overpriced, or even non-existent, goods or services. As described in a Transparency International paper on the topic, “[p]oliticians and public officials may abuse their power and influence to use local content requirements to benefit their allies and/or family members, and international companies may pay bribes and kickbacks to local companies to serve as the ‘front’ in bidding processes.” Even if government or parastatal officials are not the beneficiaries of local content transactions, these transactions can raise self-dealing concerns, because they present opportunities for employees to steer lucrative contracts to relatives or associates.

For an example of how these risks can manifest, consider the 2017 U.S. Securities and Exchange Commission (SEC) Foreign Corrupt Practices Act (FCPA) enforcement action against oilfield services company Halliburton. The SEC’s cease-and-desist order—to which Halliburton agreed without admitting or denying the allegations—focuses on a series of transactions dating back nearly a decade. In 2008, Halliburton officials were advised by Sonangol, Angola’s state-run oil company, that Sonangol was considering vetoing further subcontract work for Halliburton because the company was not in compliance with local content requirements.

The SEC alleged that following this warning from Sonangol, Halliburton identified a local company owned by a former Halliburton employee who was the friend and neighbor of the Sonangol official with authority to approve Halliburton subcontracts. According to the SEC, a Halliburton employee then undertook a series of efforts to engage the local company to fulfill local content requirements. When an alleged effort to engage the local company as a “commercial agent” with commission fees based on existing revenues from Halliburton’s Angolan operations was rejected because, among other reasons, it would require an extensive integrity due diligence process, Halliburton allegedly turned to an arrangement where the local company would provide ill-defined “real estate transaction management consulting services.” This consultancy arrangement was approved, the SEC alleged, on a sole-source basis outside of Halliburton’s standard procurement processes, and resulted in the payment of $3.7 million to the local company for no meaningful services.

While the SEC did not allege that any of this $3.7 million was channeled to any Sonangol officials, it alleged that the engagement of the local company outside of Halliburton’s applicable procurement processes, and the concealment of the true purpose of the engagement, violated the FCPA’s accounting provisions. Whereas Halliburton allegedly earned $14 million on the underlying services subcontracts approved during the period of the local company’s engagement, Halliburton paid nearly twice that—$29.2 million—to settle with the SEC, and was required by the SEC to retain an independent compliance consultant for a period of 18 months to review and evaluate the company’s anti-corruption policies and procedures.

Risk Mitigation Strategies

There are a number of risk mitigation steps companies can implement to reduce and mitigate compliance risk flowing from local content requirements.

First, as a baseline risk mitigation measure, companies facing local content issues should perform compliance risk assessments and develop and implement anti-corruption compliance policies and controls, and ensure that employees and third parties in sensitive positions are trained on these policies and controls. Apart from being a critical item in meeting regulatory expectations, risk assessments, in which companies review their operations and compliance risks, typically through both desktop review and interviews of employees and relevant third parties, enable companies to better focus their compliance efforts. Because effective compliance programs are not “one size fits all,” risk assessments are a necessary step to allow companies to target their key risks and efficiently deploy resources in the development, implementation, and maintenance of their compliance programs.

Second, because of the significant compliance and fraud risks that may arise from local content requirements in certain jurisdictions, companies operating in high-risk markets and industries should consider developing special compliance policies procedures for local content transactions. Given how local content requirements involve cross-cutting commercial, human resources, procurement, and government affairs issues, they require holistic, cross-functional, and practical solutions with input from multiple stakeholders other than just compliance professionals.

Third, regardless of whether a company has special procedures for addressing local content issues, it is critical that local content partners be subject to appropriate integrity diligence and contractual obligations. Robust, risk-based diligence on third parties is a critical part of any anti-corruption program, but it is even more important when dealing with local content partners. Attention must be given to whether the local partner is a government or parastatal official, is owned (directly or indirectly) by such an official, or hasclose economic or familial ties to such an official. If these circumstances are present, the likelihood that the official could be viewed as receiving an improper benefit related to the company’s desire to further its business interests is significant. Beyond diligence, it is often appropriate to include various compliance-related provisions in contracts with local content partners, including affirmative obligations to comply with applicable laws or compliance policies, audit and investigation rights, and termination rights.

Finally, companies engaging local content providers should implement an oversight plan, and be proactive in addressing compliance issues. While diligence and contractual provisions are critical front-end risk mitigation steps, close oversight is necessary throughout the entire life cycle of a local content relationship. This includes close scrutiny of contracts, scopes of work, invoices, and deliverables to ensure that local content partners are providing actual services in line with agreed upon terms and conditions. If red flags arise, such as invoices for services outside the provider’s contractual scope, or excessive charges, they should be promptly investigated.

This article was prepared by Covington attorneys qualified to practice law in the United States and the United Kingdom. It does not constitute legal advice. If you have further questions about your compliance programs, how to conduct due diligence on a local partner, or Covington’s anti-corruption work in Africa, please contact Ben Haley at bhaley@cov.com or David Lorello at dlorello@cov.com.

]]>What Companies Need to Know About France’s Loi Sapin II Anti-Corruption Lawhttps://www.covafrica.com/2018/06/what-companies-need-to-know-about-frances-loi-sapin-ii-anti-corruption-law/
Fri, 29 Jun 2018 14:18:36 +0000https://www.covafrica.com/?p=6970Continue Reading]]>On June 3, 2018, French tycoon Vincent Bolloré warned investors that Groupe Bolloré—a logistics provider with extensive operations in former French colonies in Africa—may suffer negative commercial and financial consequences as a result of a corruption investigation initiated by French authorities. Mr. Bolloré was questioned for two days by French police in April 2018 over allegations that Groupe Bolloré’s global advertising agency, Havas, provided improper benefits to the Presidents of Guinea and Togo in exchange for lucrative business contracts. Mr. Bolloré’s prediction on the investigation was bleak; he noted that the investigation will “last for 10 years, raids will be carried out, people will be questioned, the press will cover it day-to-day.”

The Groupe Bolloré investigation is one of the first high-profile investigations by French authorities since the December 2016 passage of France’s new anti-corruption law, titled “Loi relative à la transparence, à la lutte contre la corruption et à la modernisation de la vie économique,” (“The law on transparency, the fight against corruption and the modernisation of economic life”), but commonly referred to as “Loi Sapin II,” given its sponsorship by former French Finance Minister Michel Sapin.

Commentators have pointed to the Groupe Bolloré investigation as a game-changer in French enforcement of anti-corruption laws, one that marks the ushering in of a new era of accountability for French businesses operating in Africa. We have previously covered developments relating to Loi Sapin II here and here. Below, we outline key aspects of the Loi Sapin II regime and its broader implications for companies operating in Africa.

Background on Loi Sapin II

Although France joined the Organization for Economic Co-Operation and Development (OECD) Anti-Corruption Convention in 1997, as recently as 2012 the OECD has pressed France to improve its anti-corruption enforcement efforts. Notably, US anti-corruption enforcers have brought several high-profile Foreign Corrupt Practices Act (“FCPA”) enforcement actions in recent years against French companies, each with significant financial penalties, and French enforcers have been criticized for taking no or limited action in some of those matters.

Loi Sapin II is notable in a number of respects. Specifically, the law (1) expands the extraterritorial reach of France’s anti-corruption laws; (2) obligates certain business organizations to implement compliance programs; (3) creates a new anti-corruption agency, the Agence Francaise Anticorruption (“AFA”); (4) improves protections for whistleblowers; and (5) creates a settlement framework known as the Convention judiciaire d’intérêt public (“CJIP”), which has been likened to a deferred prosecution agreement (“DPA”) under US practice.

Extraterritorial Reach of Loi Sapin II

Perhaps the most important change in Loi Sapin II is the elimination of a dual criminality requirement for prosecution of extraterritorial conduct, significantly extending the ability of French authorities to reach corrupt conduct occurring overseas. Previously, French authorities had jurisdiction to prosecute offenses committed outside of French territory where: (1) the victim or wrongdoer were French citizens; (2) the alleged conduct was unlawful under the law of the local jurisdiction and French law; and (3) either the victim or the relevant foreign authority filed a complaint. Loi Sapin II removes these requirements, and also permits prosecution of persons or entities (regardless of their citizenship or nationality) who carry out all or part of their economic activity on French territory.

Mandatory Compliance Program Requirements

Article 17 of Loi Sapin II imposes mandatory compliance program requirements for French companies that employ 500 or more employees with gross revenue of more than €100 million, as well as all consolidated subsidiaries of parent companies that meet the aforementioned size and revenue requirements. As of June 9, 2017, companies that meet these criteria were required to implement the following measures: (1) an anti-corruption code of conduct; (2) internal and external whistleblowing procedures; (3) risk-mapping that considers the company’s industry focus and geographic coverage; (4) third-party due diligence procedures; (5) internal and external accounting controls; (6) anti-corruption training; and (7) an internal monitoring and assessment system. In December 2017, the AFA published recommendations for the implementation of these measures. An English version of the AFA’s Guidelines can be viewed here.

Powers of AFA

The AFA replaces the previous Service Central de Prévention de la Corruption (“Central Service for the Prevention of Corruption”). It is anticipated to have four times as many staff as its predecessor agency (more than 60 compared to 16) and a budget of €10–15 million. While the AFA does not have the power to investigate or prosecute bribery allegations, it has substantial powers to ensure that covered entities comply with Article 17 requirements. This includes the power to request documents, conduct site visits, and interview personnel during such site visits. As an enforcement mechanism, the AFA is empowered to impose fines against companies that fail to comply with program requirements, as well as relevant company leadership. Fines may also be imposed for refusal to share information requested by AFA.

Whistleblower Protections

Loi Sapin II includes stronger whistleblower protections than were previously available under French law. These protections extend to any disinterested person who in good faith reports a violation of French law or an issue that poses a serious threat to the public interest of which he or she has personal knowledge. Companies are required to guarantee confidentiality and protect the identity of whistleblowers (Article 9), and are prohibited from retaliating against whistleblowers (Article 10). To enjoy the law’s protections, a whistleblower must first report suspected wrongdoing to his or her supervisor; only when the supervisor does not act within a reasonable timeframe or in the event of imminent danger is the employee permitted to report directly to the authorities. Loi Sapin II also provides immunity to whistleblowers (Article 7); and anyone found to create an “obstacle” to the filing of a whistleblowing report may face a fine of €15,000 and up to one year in prison, while revealing a whistleblower’s identity carries a potential two-year prison sentence and a fine of up to €30,000.

CJIPs

Loi Sapin II introduced a resolution mechanism for enforcement actions known as the “CJIP” (short for “convention judiciaire d’intérêt public”) into French Criminal Law. Similar to deferred prosecution agreements employed by US authorities, CJIPs are negotiated settlements that apply to corporate entities. Under a CJIP, an organization may, without pleading guilty, agree to a combination of monetary remedies and compliance measures for alleged violations of Loi Sapin II. Like US DPAs, CJIPs may require the imposition of corporate compliance monitors. While France’s CJIP regime does not include a formal framework for assessing credit in a resolution for a company’s cooperation in the government’s investigation or voluntary disclosure of potential misconduct, we expect that these issues will prove to be significant factors in French prosecutors’ decisions whether to proceed by CJIP, and, if so, the remedies under a CJIP.

With the Loi Sapin II regime still in its relative infancy, trends are difficult to predict with confidence. However, we see two immediate takeaways for companies subject to Loi Sapin II:

Companies Should Be Prepared for Significantly Increased Risk of Investigation of Extra-Territorial Conduct Under Loi Sapin II

It is perhaps too early to predict whether the Groupe Bolloré investigation will prove to be the tip of the spear in an aggressive anti-corruption enforcement campaign by French prosecutors over the coming years. However, we would expect more high-profile investigations to follow, and the combination of Loi Sapin II’s extensive extra-territorial reach and its whistleblower provisions significantly increases the likelihood that corrupt conduct abroad will come to the attention of French prosecutors. This raises the stakes for French companies dealing with allegations of corruption abroad. Companies finding themselves in this position would be well-advised to conduct internal investigations that are sufficiently prompt and thorough to withstand pressure-testing from enforcement authorities, and also to take swift remedial actions, including appropriate enhancement to anti-corruption policies and controls. While time will tell, as French enforcers begin to hit their stride and the investigation and resolution process under Loi Sapin II becomes more mature, we expect that there will be increased focus on issues of self-reporting, cooperation, and remediation, much as is the case in US and UK investigations. Moreover, recent enforcement actions have demonstrated increasing cooperation between French authorities and foreign enforcers, including US enforcers, raising the prospect of investigations and enforcement actions with multiple regulators at the table.

Entities subject to Loi Sapin II’s mandatory compliance program requirements must grapple with a series of requirements and AFA oversight of their compliance programs. Although the AFA has indicated that it does not wish to dictate the specific methods through which companies achieve their compliance objectives, the AFA guidance will undoubtedly inform the measures that companies subject to Article 17 of Loi Sapin II (and perhaps companies not strictly subject to Article 17) put in place to meet its requirements. The AFA guidance is largely consistent with OECD best practices and the guidance that has emerged relating to the FCPA and UK Bribery Act; indeed, the AFA has indicated that it sought to integrate into its recommendations the requirements of international anti-bribery legislation to ensure that French standards are consistent with international best practices. Accordingly, companies that have already implemented compliance programs consistent with the guidance relating to the FCPA and/or the UK Bribery Act and are subject to the Article 17 compliance program requirements in France will likely be able to retain the core elements of their compliance programs, although additional measures may be required to meet some of the prescriptive requirements set forth in Loi Sapin II.

What this means in practice is that companies subject to Article 17 may not have the luxury of a prolonged timeframe to build a mature and effective compliance program. What is more, the AFA guidelines, which include detailed methodologies for risk assessment and monitoring the effectiveness of compliance programs, make clear that a “check the box” approach will be insufficient. As a result, companies that are subject to Article 17 would be well served to seek advice from professionals with experience implementing, and sustaining, compliance programs that pass muster with US and UK authorities. Moreover, even after initial implementation processes are complete, companies subject to Article 17 would be best advised to perform periodic assessments of the effectiveness of their programs.

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This blog was prepared by Covington attorneys qualified to practice law in the United States and the United Kingdom. It does not constitute French law advice. Covington partners with French counsel with anti-corruption expertise to provide integrated anti-corruption compliance advice that takes into account French law as well as the international best practices that have developed under the US Foreign Corrupt Practices Act, the UK Bribery Act, and other international anti-corruption laws and conventions. If you have further questions about Loi Sapin II or Covington’s anti-corruption work in Africa, please contact Ben Haley at bhaley@cov.com or Sarah Crowder at scrowder@cov.com.

U.S. Policy: The derogatory remarks that President Trump made about Africans and Haitians, which he denies having said, create a negative image for the U.S. across the region as the year begins. Nevertheless, the administration will push forward on several fronts. Commerce Secretary, Wilbur Ross, is expected to visit Sub-Saharan Africa in the first quarter of 2018 along with members of the Presidential Advisory Committee on Doing Business in Africa (PAC-BIA), an Obama-era initiative continued under Trump. Secretary of State, Rex Tillerson, may also visit the region. As we analyze here, the Administration’s National Security Strategy focuses on combatting corruption in Africa, moving toward more reciprocal trade relationships and modernizing development finance tools. On January 17, 2018 the House passed the African Growth and Opportunity Act (AGOA) and Millennium Challenge Account (MCA) Modernization Act. The bill will provide technical assistance to help eligible partners fully utilize AGOA and, perhaps most significantly, enable the Millennium Challenge Corporation to enter into concurrent, regionally-focused compacts to promote trade among eligible partner countries. The bill is now in the Senate and will likely be passed later in the year.

Anti-Corruption: Next week the African Union will meet for its 30th Summit, with the theme “Winning the Fight Against Corruption: A Sustainable Path to Africa’s Transformation.” Consistent with this focus, anti-corruption initiatives are on the rise throughout the continent. For example, Angola’s new president, João Lourenço has taken swift and decisive actions to root out nepotism and corruption. In December 2017, he changed the leadership of nine public utilities and companies, including oil and gas producer Sonangol and the diamond mining company Endiama. The election of Cyril Ramaphosa as president of the African National Congress and the prospective state prosecution of companies involved in the sprawling “state capture” investigation are likely harbingers of a continued focus on anti-corruption enforcement in South Africa in 2018. The extraterritorial application of the Foreign Corrupt Practices Act (“FCPA”), as well as other foreign anti-corruption laws such as the U.K. Bribery Act, is well-established. The extent to which the effort of African governments to fight graft will result in an increase in FCPA enforcement activity related to the continent is something to watch over the course of the year. Against this backdrop, corporates would be well-served to focus on developing and maintaining anti-corruption compliance programs.

Project Finance: Project Finance projects in Africa are likely to increase in 2018, especially in energy/power and transport sectors. For example, spending on electricity production and distribution in Sub-Saharan Africa is expected to reach $5 billion by 2025. The Power Africa initiative launched by former President Obama, and continued by the Trump Administration, is expected to contribute significantly to increased investment in infrastructure projects. The initiative’s 150 public and private sector partners have already mobilized $14 billion in actual investment in the 85 Power Africa projects that have reached final close, which will add more than 7,000 megawatts of new power generation. Additional finance is expected from China, India, and Japan. Sub-Saharan Africa’s wealth of natural resources, particularly in the oil and gas sector, will continue to attract investors. Infrastructure spending for petroleum and natural gas extraction is expected to grow at an average annual rate of 7.1 percent between now and 2025, resulting in a total investment of $8 billion over that time period. Notably, funding models are changing in Africa, and models such as public-private partnerships (PPPs) are to become more prevalent. However, in the energy sector, the preferred model of funding remains privately financed Independent Power Producers. Larger state-owned companies in South Africa have made progress in issuing bonds to raise capital, but with South Africa’s sovereign credit rating under pressure, debt capital raising by smaller State Owned Enterprises (SOEs) may prove challenging.. The African Development Bank is expected to continue to provide a platform for bridging finance, direct loans and loan guarantees supporting infrastructure financing. Southern Africa will account for the largest share of infrastructure spend and capital project activity on the continent, and most of the activity is likely to occur in the South African energy sector. Other important investment destinations include Angola, Ghana, Nigeria, and Mozambique.

South Africa: There is a palpable sense in South Africa that the country has turned a critical corner in the fight against government corruption with the election of Cyril Ramaphosa as president of the ANC. Ramaphosa’s 2018 agenda is significant: root out the corruption tied to President Zuma by prosecuting individuals and entities implicated by Guptagate, restore the reputation of the ANC as a genuine party of the people, and revive South Africa’s economy. Ramaphosa must also prepare for a decisive election in 2019 while delivering on job creation and managing the tension between market-based land reform and expropriation. An early indicator of Zuma’s fate will be whether he delivers the February 8 State of the Nation address to Parliament; the expectation is that Zuma will be forced out of office over the near-term. It’s more a question of when, not if. Analysts will also be watching to see how Ramaphosa will revitalise the State Owned Enterprises (SOEs) and whether he will act against executives in the country’s key SOEs, who have become widely regarded as having facilitated “state capture.”

Angola: President João Lourenço continues to move forward on the reforms he initiated immediately upon assuming the presidency. The government has announced plans to tap the Eurobond market, probably by June, and it announced that it will repay contractors $5 billion of arrears by 2019. The government has also published a mid-term national development plan (2018-2022) that identifies 88 actions it will take to reform the economy. Key actions include strengthening the financial sector and assessing the vulnerability “of every and any” commercial bank. Whether the government seeks a deal with the IMF to support its reform efforts will be an important issue to watch in 2018.

Zimbabwe: One of the most pressing questions facing the new government in Zimbabwe is whether it can hold “free, credible, fair and indisputable” elections, as President Emmerson Mnangagwa has promised. Mnangagwa has said electoral observers from the EU, the Commonwealth and the UN would be invited to monitor the polls, a welcome departure from Mugabe’s refusal to allow international election observers. Whether the more than 3 million Zimbabweans in diaspora will be able to vote will be important to the credibility of the elections. The success of the elections will have an important bearing on whether the international community is willing to support an economic reform package, which the government needs desperately. Finance Minister Patrick Chinamasa has announced a bold economic reform program which he hopes will lead to 4.5 percent growth in 2018; how he deals with government spending, the country’s $1.8 billion to the IMF, agricultural and civil service reforms will be key early challenges.

Nigeria: With presidential elections scheduled for early 2019, political jockeying will intensify in 2018 with a prime focal point being on President Buhari’s health and whether he will stand for reelection. Elections for governorships in Ekiti (July) and Osun (September) will be important indicators of the preparedness of the Independent National Electoral Commission (INEC) to manage next year’s presidential elections. The government’s action on the enduring challenges of corruption, petroleum shortages, and unreliable access to power will continue to dominate the political debate. Economic growth is expected to accelerate to 2.5 percent (it was 1 percent last year). This growth will be spurred by improving oil prices and reforms in the financial, manufacturing, and other sectors.

Kenya: Warning that “lingering political uncertainty can further undermine business confidence and stunt a robust recovery,” the World Bank has downgraded its 2018 growth forecasts for Kenya from 5.5 percent to 4.9 percent. Political turmoil during the 2017 elections caused corporations to take a cautious approach to Kenya and delay investments. Healing the ethnic divisions that divide Kenya, rooting out endemic corruption, and addressing drought that has caused food prices to spike are just a few of the challenges facing President Uhuru Kenyatta. Initiatives to foster lasting reconciliation among Kenyans and regaining the confidence of investors will be key challenges for Kenyatta in 2018.

Mobile Money: Mobile money will continue to grow throughout 2018 as a significant engine of economic growth and inclusion, perhaps faster in Africa than in any other region. Currently, there are 277 million mobile money accounts and 177 million bank accounts in Africa and 30 countries have enacted mobile money enabling regulation in Sub-Saharan Africa. Since 2011, there has been a ten-fold increase in the number of mobile money agents reaching approximately 1.5 million, creating a range of opportunities for small and medium enterprises.

Business and Human Rights: Companies with operations in Africa should track the following legal developments in 2018. Legislative proposals in states including Australia, Netherlands, and Hong Kong may, if passed, impose additional modern slavery and child labor reporting and due diligence obligations on relevant companies with respect to their global operations and supply chains, including on the African continent. Also, coinciding with the increased promotion of “access to remedy“—the third pillar of the UN Guiding Principles on Business and Human Rights—recent judgments in the UK and Canadian courts have seen claims allowed to proceed against UK/ Canadian headquartered companies in respect of alleged human rights offences connected to their foreign subsidiaries in Zambia and Ethiopia. Judgments on the merits are pending. Companies should consider appropriate risk mitigation strategies and measures.

About Covington’s Africa Practice

In November, Covington celebrated the opening of its office in Johannesburg, South Africa. With a leading project finance team in Johannesburg, London, and Dubai, Covington is positioned to service companies’ project finance needs throughout the continent. Through its Global Problem Solving capability, Covington’s Africa practice advises clients on matters related to political and regulatory risks. Covington has also developed a special suite of services for financial institutions, banks and non-bank financial institutions across the continent. This set of services includes a focus on six key compliance areas: (1) anti-corruption (including compliance with the U.S. Foreign Corrupt Practices Act (FCPA) and UK Bribery Act); (2) export controls and economic sanctions; (3) anti-money laundering; (4) privacy and data protection; (5) cybersecurity; and (6) competition, including cartel enforcement. If you have questions about your company’s operations in Africa, please contact Witney Schneidman at wschneidman@cov.com.

]]>Covington Welcomes Liberian President Sirleaf for Discussion on Emerging Public Leaders Initiativehttps://www.covafrica.com/2017/12/covington-welcomes-liberian-president-sirleaf-for-discussion-on-emerging-public-leaders-initiative/
Mon, 11 Dec 2017 15:27:09 +0000https://www.covafrica.com/?p=6892Continue Reading]]>On December 7, 2017, Covington’s Africa practice welcomed Liberian President Ellen Johnson Sirleaf for a roundtable discussion on how to expand the training and support of civil service leaders in Africa through Emerging Public Leaders (“EPL”).

Witney Schneidman, President Sirleaf, and Betsy Williams

President Sirleaf was the first woman to be inaugurated as president of an African nation in 2006. President Sirleaf explained one of the greatest challenges she faced was rebuilding Liberia’s civil service and encouraging young people to be apart of it after inheriting a nation torn apart by twenty years of civil war.

Around the same time President Sirleaf was entering office, Betsy Williams was managing the Scott Fellows program in Liberia, an effort to recruit expats and diaspora to Liberia to support various cabinet ministries. After serving as an assistant in the Ministry of Health, Ms. Williams saw first-hand the needs of the Liberian civil service and developed the concept of EPL, a non-profit designed to attract and train high-achieving young Africans to bridge the capacity gap in civil service in Africa. EPL’s flagship program, the President’s Young Professionals Program (PYPP), was launched in Liberia in 2009. PYPP has trained over 120 fellows, the majority of whom continue to serve in the Liberian government.

Covington gathered other non-profit experts focused on leadership development to discuss the expansion of EPL’s model throughout the African continent, including Ghana. President Sirleaf reflected on her experience with PYPP in Liberia and participants engaged in a lively discussion with her about the EPL model, her vision for the future of development in Africa, the importance of investing in African governments, and her reflections on Liberia’s handling of the Ebola crisis.

Covington represents EPL on a pro bono basis.

]]>Opportunity in Africa: Covington Launches Johannesburg Officehttps://www.covafrica.com/2017/12/opportunity-in-africa-covington-launches-johannesburg-office/
Wed, 06 Dec 2017 19:19:50 +0000https://www.covafrica.com/?p=6877Continue Reading]]>Opportunity in Africa abounds. Half of the world’s 25 fastest-growing economies are on the continent and according to the United Nations (UN), half of the anticipated global population growth between now and 2050 will occur in Africa. Upwards of 800 U.S. companies have a presence in South Africa alone. Yet, challenges remain: only 35 percent of the population in Sub-Saharan Africa has access to electricity and the World Bank estimates that an annual investment of approximately $90 billion is required to address the region’s infrastructure needs.

Inspired by the continent’s opportunities and eager to address its challenges, on November 13-15, Covington celebrated the opening of its office in Johannesburg, South Africa. As explained by the firm’s chairman Tim Hester in an interview with BBC Africa Business Report, Covington has built a top-notch project finance team in Johannesburg, London, and Dubai that is positioned to service companies throughout the continent.

The firm is also equipped to leverage its global resources to advise companies on the political and regulatory risks they may face in sub-Saharan Africa, focusing on six key compliance areas: (1) anti-corruption (including compliance with the U.S. Foreign Corrupt Practices Act (FCPA) and UK Bribery Act; (2) export controls and economic sanctions; (3) anti-money laundering; (4) privacy and data protection; (5) cybersecurity; and (6) competition, including cartel enforcement.

Complementing this compliance focus is Covington’s Africa Practice and its unparalleled global-problem solving capabilities, led by Witney Schneidman. Covington’s capabilities in this regard were aptly demonstrated by the firm’s assistance to South African telecom operator MTN in 2016, in which Covington Partner and former U.S. Attorney General Eric Holder assisted in negotiations with the Nigerian government, resulting in a favorable resolution that reduced MTN’s financial exposure by more than half.

Mr. Holder joined the Covington delegation in South Africa in November and shared his perspective on numerous issues, including the potential for the extraterritorial application of U.S. anti-corruption laws on the continent. Mr. Holder’s comments come against the backdrop of the corruption scandal involving the Gupta family and President Jacob Zuma, which has implicated a number of prominent multi-national corporates.

As reported by Business Day, Mr. Holder’s comments emphasized the broad extra-territorial reach of U.S. corruption laws, and noted that seven of the ten largest fines levied pursuant to the FCPA were against companies based outside the United States. Mr. Holder also noted the increased cooperation among global enforcement agencies and predicted that cooperation between U.S. authorities and local authorities in Africa would increase as economic growth on the continent continues and where national security issues that affect U.S. interests emerge. As Mr. Holder explained, in view of these risks, it is critical for corporations doing business on the continent to put robust compliance programs in place.